In the development and manufacture of numerous products, it is common for a product manufacturer to incorporate components manufactured by and purchased from others. For example, the manufacturer of an electronic device, such as a smartphone or computer will typically purchase components, such as processors or other devices, which are included within the final product. These purchased components may range from very simple, inexpensive parts, to complex, relatively expensive devices.
An important metric by which public companies are evaluated is profit margin. When a manufacturer sells a product to a customer incorporating purchased components from a third party, the cost of those purchased components, which includes the third party's profit margin, is built in to the cost of the product. Thus, the selling price of the product must accommodate both the manufacturer's own profit margin and the third party's profit margin. This is known as “margin stacking.” Since the selling price of the product may be dictated by market forces, margin stacking may adversely affect the manufacturer's own profit margin.